STRENGTHS

Political and financial support of the Gulf monarchies and Western countries

IMF Support Programme

Large gas deposits

WEAKNESSES

Poverty (40% of the population) and high unemployment

Recurrence of security issues in Sinai

Twin deficits

Banking system vulnerable to sovereign risk

RISK ASSESSMENT

Increase of growth in 2018

With the support of the International Monetary Fund, Egypt embarked on an ambitious economic reform programme in 2016. Among the significant measures, the liberalisation of the Egyptian pound on the foreign exchange market was accompanied by a depreciation of 50% against the US dollar, and led to an increase in foreign exchange reserves of 80% during the year, mainly due to the influx of capital. The depreciation of the currency has increased the competitiveness of exports while the rise in the price of imports has raised inflation to more than 30% in 2017. Social transfer policies mitigated the effect of price increases on the poorest households, but consumption slowed. Inflation should gradually decrease in 2018 as the exchange rate impact is absorbed, but rising prices for intermediate goods and services will continue to cripple the purchasing power of average households. The entry into force of the law to promote investment, as well as the respect of the agenda of the reforms initiated with the support of the IMF, should reinforce the foreign investors’ confidence. Foreign direct investment is expected to reach USD 10 billion in the 2017/2018 fiscal year, focusing on the hydrocarbon sector. The increase in gas production following the start of extraction of the giant Zohr deposit (discovered in 2015 by ENI), as well as the start of production of BP’s West Nile Delta project, is expected to increase gas production while lowering the cost of energy bills. Despite a law encouraging industrial development, investment in the industry will likely remain constrained by the central bank’s restrictive monetary policy, with interest rates rising by 700 basis points in 2017.

Continuation of budgetary consolidation

Budgetary consolidation efforts under the IMF programme should result in a gradual short-term reduction of the public deficit, which fell slightly in 2017/2018 but is expected to decrease more significantly in 2018. The increase of VAT from 13% to 14% in July 2017, as well as the rise in customs taxes, allowed a slight increase in budget revenues. Public spending remained controlled by the moderation of the wage bill with a de-indexation of bonuses for civil servants. Despite a drop in the state’s participation in fuel financing (50% increase in the price of refined oil in June 2017), the elimination of subsidies planned for 2017 has been postponed to 2018, the government having made the choice to absorb the additional cost of the exchange rate impact on regulated and energy products. Although the primary deficit declined in 2017, the depreciation of the Egyptian pound and the rise in domestic interest rates led to an increase in debt service, which remains the third largest expenditure item. Characterised by short maturities, the debt remains mainly domestic. It could therefore be hindered by the tightening of the ECB’s monetary policy. The IMF loan and the two global bonds issued in 2017 (USD 7 billion), however, contributed to an increase in the portion denominated in foreign currency. The pursuit of budgetary consolidation in 2018 should lead to a primary surplus of 0.4% and slightly reduce the trajectory of public debt, which remains high.

The transition to a floating exchange rate allowed for a reduction in the external imbalance after an adjustment period. Higher exports, tourism revenues, and expatriate remittances have resulted in lower current account deficits. The capital account surplus has increased due to an increase in foreign direct investment, in addition to portfolio investment. Private debt in foreign currency, held largely by the banking system, has been reduced, limiting the risk factors associated with external impacts. Exports are expected to continue to grow in 2018. Price competitiveness gains and increased production of gas and electricity should continue to generate a decrease in the current account deficit in 2018, via increased exports.

2018 election

The Egyptian presidential election is scheduled for May 2018. President Abdel Fattah Al Sissi has announced that he will not seek a third term, as the constitution allows only two successive four-year terms. However, no alternative successor seems to have emerged, Mr Sissi having eliminated all forms of opposition – Islamist as well as both secular and liberal. The president’s security regime is often criticised for not respecting human rights, and for the repression of certain figures of the Egyptian revolution of 2011 in particular Nevertheless, Egypt remains a pivotal centre of both regional stability and the fight against terrorism, which enables it to play a leading role in the Middle East and maintain close relations with both Europe and the United States. Egypt has been the main mediator in the political reconciliation between Hamas and the Palestinian Authority. The country also sided with Saudi Arabia, one of its allies, in the Qatar crisis, becoming one of the Arab countries outside the Gulf Cooperation Council to boycott the Emirate.